TY - JOUR
AU - Acemoglu,Daron
AU - Golosov,Mikhail
AU - Tsyvinski,Aleh
TI - Power Fluctuations and Political Economy
JF - National Bureau of Economic Research Working Paper Series
VL - No. 15400
PY - 2009
Y2 - October 2009
DO - 10.3386/w15400
UR - http://www.nber.org/papers/w15400
L1 - http://www.nber.org/papers/w15400.pdf
N1 - Author contact info:
Daron Acemoglu
Department of Economics, E18-269D
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617/253-1927
Fax: 617/253-1330
E-Mail: daron@mit.edu
Mikhail Golosov
Department of Economics
Princeton University
111 Fisher Hall
Princeton, NJ 08544
Tel: 609/258-4003
Fax: 609/258-6419
E-Mail: golosov@princeton.edu
Aleh Tsyvinski
Department of Economics
Yale University
Box 208268
New Haven, CT 06520-8268
E-Mail: a.tsyvinski@yale.edu
AB - We study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. We show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another). For low discount factors, the economy converges to an invariant stochastic distribution in which distortions do not disappear and labor supply and consumption levels fluctuate over time. The labor supply of groups that are not in power are taxed in order to reduce the deviation payoff of the party in power and thus relax the political economy/sustainability constraints. We also show that the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power. This result contradicts a common conjecture that there will be fewer distortions when the political system creates a "stable ruling group". In contrast, political economy distortions are less important when there are frequent changes in power (because this encourages compromise between social groups). Despite this result, it remains true that distortions decrease along sample paths where a particular group remains in power for a longer span of time.
ER -